I was, until recently, Economics Editor of The Telegraph. You can find my book - 50 Economics Ideas You Really Need to Know - here.

Would CGT increase trigger a housing and stock market dip?

I seriously doubt Capital Gains Tax will be increased this financial year. Should the coalition government decide to do so immediately (their current avowed plan is to raise the rate of CGT from 18pc to 40pc though there is little detail beyond that), they will be breaking almost half a century of constitutional convention, which says that this tax should only ever be increased at the turn of the fiscal year. Since CGT was introduced in 1965, it has only ever been fiddled with at the start of a new fiscal year (in other words, next April).

There is a pragmatic reason for this – it would mean the Government abitrarily treating household and business profits as investment for one half of the year and income the other – something which isn’t usually done. Changes like that are far easier to make to VAT or fuel duty, for instance, which are charged at the point of sale, or even income tax, since it can be recalculated monthly through PAYE. Moreover, since CGT is something which is charged on profits earned over a long period of time, an instant increase would be quasi-retrospective.

All of which makes it likely that if the Government does decide to increase CGT to 18pc to 40pc, it will have to wait until the start of the next financial year to implement it. What are the implications of this. One obvious point is that if people know an increase is on the way they will act very quickly to try to avoid paying the extra tax. This means that one might expect a flood of second homes to come onto the market before the change takes place, which in turn would be very likely to depress the housing market.

The same is likely to apply to shares: if you know you might suddenly have to pay 40pc on your share price gains rather than 18pc, then the obvious thing to do is to sell off before the increase comes into effect. As such, a CGT increase, if pre-announced, would almost certainly lead to a quite dramatic fall in house prices and, just before the change kicks in, a sharp fall in share prices.

It is, in a sense, the opposite of the MIRAS change in the 1980s. As you may or may not recall, before then, mortgage holders were entitled to offset their mortgage interest against tax (mortgage interest relief at source, it was called) – something which made it far cheaper to borrow to own a home. Nigel Lawson’s announcement that he was ditching the tax perk triggered a massive rush to buy property – which ultimately contributed to the housing bubble which imploded in the early 1990s.

None of this is to say capital gains tax is inherently a bad thing to increase. It was right to get rid of MIRAS. But it is to point out that decisions like that always have significant unintended consequences. In CGT’s case, these consequences are likely to be a double-dip in the housing market and further share price falls. The message is to tread carefully, and to introduce changes gradually. Hopefully George Osborne will take note.

PS I touched on these broader issues in an analysis piece for the paper this morning:

“The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

So said Jean-Baptiste Colbert, who ought to have known, having tried to keep France’s public finances in balance back in the days of Louis XIV.

Colbert’s point was that politicians should think very carefully about what taxes to raise, and by how much, before they start removing the feathers.

It is a lesson the newly installed coalition Government might have done well to remember before proposing to increase capital gains tax: a levy with far-reaching consequences – and with the propensity to cause an awful lot of hissing.

PPS On the question of whether we need a capital gains tax in the first place, I come back again to the following idea from Princeton economist Alan Blinder, written three years ago.

So just remember one simple principle: If we tax Activity A at 15 percent and Activity B at 38 percent, a free-market economy will give us more A and less B. Some of this shifting will represent genuine movements of resources out of B and into A — including those bad investments I just mentioned. The rest will be paper manipulations devised to avoid taxes.